Why didn't Nortel's auditor discover the misstatements?

At the time of writing, we do not know why the auditors did not discover the cookie jars or there fraudulent use. Provisioning involves significant judgment on the part of company executives. Auditors review and challenge the provision estimates but rarely have more expertise than client personnel, and do not hire outside valuation experts unless there is reason to suspect misrepresentation.
Nortel's finance executives apparently stretched the judgment inherent in the provisioning process to create a flexible tool to achieve EBT targets. Making accounting estimates frequently requires management to develop models and assumptions regarding possible outcomes, including timing, transactions or events that are uncertain at the time of the estimation. Guidance on audit procedures for validating accounting estimates, including materiality and restatements, remains unclear and dispersed throughout different sections of the Auditing Standards. However, auditors should ensure that the client is using an appropriate model and considering reasonably accurate assumptions. In some cases auditors may opt for consulting with legal or actuarial experts in reviewing very material estimates.
Sometimes auditors are too concerned with the present year and place too much confidence on previous years' judgment. If the auditors deem a liability to be valid because it was reviewed in previous years, they may only ask management for current explanations to validate the liability's reversal. Auditors should also verify the validity of the original liabilities when they were subsequently reversed. It is conceivable that the auditors did not thoroughly review the end-of-period adjusting entries related to the cookie jar reversals because they were unaware of them, or considered them to be not material.

feeling super confident now